Tiebout's Tale in Spatial Economies: Entrepreneurship, Self-Selection, and Efficiency

This paper establishes the existence and efficiency of equilibrium in a local public goods economy with spatial structures by formalizing Hamilton's (1975 Urban Studies) elaboration of Tiebout's (1956 JPE) tale. We use a well-known equilibrium concept from Rothschild and Stiglitz (1976, QJE) in a market with asymmetric information, and show that Hamilton's zoning policy plays an essential role in proving existence and efficiency of equilibrium. We use an idealized large economy following Ellickson, Grodal, Scotchmer and Zame (1999, Econometrica) and Allouch, Conley and Wooders (2004). Our theorem is directly applicable to the existence and efficiency of a discrete approximation of mono- or multi-centric city equilibrium in urban economics with commuting time costs even if we allow existence of multiple qualities of (collective) residences, when externalities due to traffic congestion are not present.